Tax Man in Hot Pursuit of Landlords – guest blog by Roberta Ward of My Property Mentor

Note - the Landlord Law Blog has now moved to www.landlordlawblog.co.uk.

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This post first appeared on Roberta’s excellent My Property Mentor Blog on 19 October 2009.

You may not be aware of this- I certainly was not-but HMRC are actively searching for landlords who are avoiding paying tax either by accident or by design.

HMRC is actively searching local newspapers for information on planning applications for flat conversions.

If the planning application was for a number of flats within one house they will try to find out if the landlord was filing a tax return. (Sneaky!) They are checking for a ‘UTR’- Unique Taxpayer’s Reference. This 10 digit number is ta way for them to start the chase up. It allows them to see if the taxpayer was declaring the letting income. If you are then you would be entered on the “Not Worth Further Pursuit” database.

However…..
If you are Self Assessment registered and not declaring the income, the fun begins. They will send a 116 form, requesting information from the District Valuer, this tells them how much the landlord paid for the property, date of purchase and from whom the landlord purchased it. ( eeek!)

The next step is for them to check Experian to seek any further linked addresses to your name. If so, they will send more 116s, and see if more properties were not declared. More often than not, this yields spectacular results for the HMRC.

So, what if they are unsuccessful? Well, they may ask the District Valuer for a ‘Covosearch’, a historical list of properties, bought by the landlord, or possibly members of the landlord’s family friends and associates. If by chance the family member is a minor, they will suspect the landlord of attempting to limit his tax liability, and that non-compliance was taking place. (You have been warned!)

Further Enquiries
Now, if they decide that you are part of non-compliance, your case would be then be subject to a full enquiry. On the other side of the coin, if you are not on Self Assessment, you would be referred to the ‘Hidden Economy Team’, where you would be requested to complete returns with the letting income included. OK, hands up those who knew just how much power the HMRC have to chase you? How many investors have been advised by greedy marketeers and brokers into setting up sizeable portfolios in their family members/ kids/ friends names to avoid the many forms of tax?

Other Ways They Can Chase You
Apart from the local newspaper, another source of locating non-compliant landlords is via a Gangmasters’ project of licensed labour providers, which may have offshoots of properties owned in which a vast amounts of tenants were placed in just one room. (When we had a large influx of EU members there were stories of Polish workers living cheek by jowl in this manner.) Usually a family member would be acting as the landlord, leaving the Gangmaster to exploit the workforce.

Yet another way of locating non-compliant landlords is to establish (via the London Information System (LIS) database) how much housing benefit was paid to a landlord by a local council for the tenants. Local councils are duty-bound to place this information on the LIS database for HMRC.

Last but not least, they can also find, via LIS, rental income submitted to HMRC from letting agents. (Ed: they may also be able to track you via the tenancy deposit schemes which pass information on to the government)

Get Your Tax Sorted-NOW!
This government is very strapped for cash and in my opinion we can expect more of this type of behavior. We know already that banks are employing forensic accountants more and more now too (see my recent blog here for more info). The situation is likely to get worse as the government search more actively for spare cash trapped in the system. The tax man is coming folks- you have been warned. Sort your stuff out sooner rather than later.

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If you need help, Roberta's service may be able to assist. You can email her via her main website http://mypropertymentor.co.uk.